IT IS ONE OF THE fastest-growing economies in the world posting annual growth in near double digits in recent years. It has 1.2 billion people and the number of middle-class households is growing rapidly. So why are global investors turning their backs on India? And what does this mean for Irish companies?
Along with China, India has been one of the economic success stories of this century, and the recipient of billions of dollars in foreign investment.
This year the economy is expected to expand by 11 per cent, with predictions that growth could outpace China within three to five years. Many of its major companies are emerging as true global players. Tata Motors, for example, which manufacturer of the “affordable” Nano microcar, also owns former British brands Jaguar and Land Rover.
Some Irish companies have been quick to exploit the opportunities presented by the Indian market. Such large businesses as CRH, the Kerry Group and Kingspan, have moved into the market, while the number of small and medium-sized enterprises is also on the increase. Enterprise Ireland is working with more than 100 Irish companies that are exporting to India, an increase of 10 per cent on 2009. More than 30 Irish companies have opened offices there.
More recently, e-learning group EMPGI announced a €5 million deal to build children’s learning centres across India with its New Delhi-based joint venture, S Chand Harcourt.
While the opportunities offered by such a huge market are great, so too are the challenges. India is a notoriously difficult environment in which to set up a business.
According to the World Bank’s Doing Business survey of 183 economies, India ranked 134th in terms of the ease of doing business behind such countries as Iran, Kosovo, Nicaragua, China, Russia and Brazil. China came in 79th, while Ireland was ninth.
When it came to starting a business, India was ranked 165th, making it the 18th worst country. Getting out of the country isn’t much easier, as it ranked 134th overall for the ease of closing a business.
“It’s very possible to set up a successful business in India, but it’s very, very different,” says Allan Schouten, managing director of the Asian business of PM Group, a global project management company. “If you go in without a full understanding of how best to set up a business, there are many hurdles you can trip over.”
Gabriel McCarrick, head of Enterprise Ireland’s Indian office in New Delhi, agrees. “It’s not cheap, not easy and requires a lot of work,” he says, putting India on a par with such places as Morocco and Burkina Faso. China has a more open economy than India, he says.
“India’s openness is a work in progress,” he says, adding that Ireland does about three times as much business with China.
Protectionism means that there are foreign ownership restrictions in place aimed at protecting indigenous businesses.
In insurance, foreign companies are allowed to own no more than 26 per cent of a firm, while in retail, foreigners are banned from owning stores that sell more than one brand of product.
“The trading caste has been able to muster its political power to ensure that the Government doesn’t allow the likes of Tesco to wipe it out,” says McCarrick.
It’s also a country of disturbing contrasts. While visitors to Bangalore, India’s high-tech city may be impressed at its modernity, driving through Mumbai or New Delhi can be a sobering experience.
“It can shock Europeans,” says McCarrick. Some people from Ireland cannot cope with the ugliness, the desperation and the dirt of it, he says.
Schouten agrees. After he first moved there, the horrendous images of poverty he saw while travelling from his hotel to clients’ offices played on his mind for days afterwards.
Last year’s Commonwealth Games shone a light on one of the less desirable aspect of doing business in India: rampant corruption. Earlier this year, ratings agency Moody’s said the chaos caused by the games would give multinationals considering expanding in India “a reason to think twice”.
They seem to have done so: foreign direct investment fell by more than 31 per cent, to $24 billion (€16.5 billion) last year.
It’s a problem that doesn’t seem to be going away. When retiring as head of India’s anti-corruption watchdog last year, Pratyush Sinha declared that 30 per cent of his fellow Indians were utterly corrupt, while 50 per cent were borderline. He also noted that there was greater social acceptance of corruption.
While many foreign businesses say corruption is something they have not come across in India, some locals say it has become a part of Indian life, and it seems to be more endemic in the public than the private sector.
Given the complexities of operating in India, it is no surprise to learn that most companies looking to set up business there, do so on a joint venture (JV) basis.
“It’s a huge place and business is more complex than in Europe,” says Gerard Keenan, chairman of Keenan System, a Carlow-based animal feed technology firm, which is working on a partnership agreement with a local firm. “It’s a more challenging environment to figure out what’s going on.”
When the PM Group looked to India, it did so in conjunction with Indian architectural practice, VA Group.
“The JV route seemed right,” says Schouten. “It gave us immediate market knowledge, we could manage risk and the businesses were complementary.”
Schouten recommends that other firms consider this approach. “Look to local companies to see if a joint venture formula will work. Ireland is a good gateway to Europe – and it can work for them also,” he says.
McCarrick warns that companies shouldn’t rush into a joint venture. “The last option you should look at is a JV,” he says. “People don’t put enough thought into them. They’re a simple solution to a complex problem.”
There have been many instances in which companies left the Indian part of the operation, such as handling corruption, caste systems, licensing and labour laws to their Indian partner, and got stung on the deal. “It isn’t just a success story, the streets are not paved with gold,” says Schouten.
Companies need to commit to the market and set up an operation in India. “Make sure you do all your homework or it could be a painful investment,” he warns.
Underestimating the sophistication of the indigenous business sector, or not being aware of local customs and culture, can cause problems.
“You can’t just take a product or service that works successfully in the US, for example, and think it will work in India. It won’t,” says McCarrick.
If you cannot create value, you have no commercial reason to be there, says Keenan. The rewards can be immense, however, for the companies that overcome the obstacles and manage to make it work in India.
“It’s undoubtedly a market of enormous potential that’s emerging as a global player,” says McCarrick.
For Irish companies, the potential is mainly at the high-end of the spectrum in sectors such as medical devices, life sciences, IT, and telecommunications. One area of significant opportunity is food technology, with the Indian dairy market expected to open up completely in the near future.
“If Ireland wanted to do something very serious, that would be to make itself indispensable to India’s dairy industry. If we don’t do it, New Zealand will,” says McCarrick.
This idea led Keenan Systems to start examining the Indian market about four years ago. It is now working on developing a €300 million business alongside its Indian partner.
While Irish companies may need time to grapple with the difficulties of the Indian market, more and more are starting to see it as part of their futures.
“The level of curiosity is quite high and is mounting all the time,” says McCarrick, pointing out that there are three phases of interaction with Irish companies: curiosity, interested and committed.
“Most traffic from Irish SMEs is between the curiosity and interest stage,” he says. But, as the balance of power continues to shift eastwards, companies will need to move to the committed stage. “If you don’t have a strategy in India, you’re in trouble.”
Keenan System
IN 2007 Carlow-based animal feed technology company, Keenan System, started to look into the Indian market, which is the worlds largest milk producer at about 112 million tonnes. Company chairman Gerard Keenan says the firm, which focuses on creating more efficient feeding systems for dairy cows, was aware that the food production sector was growing rapidly there, particularly dairy.
So Keenan hired an MBA student from Griffith College in Dublin to look at opportunities in the Indian and Chinese markets. Following this, they went out to look at how the food industry was organised there, and how Keenan System might become involved.
“It was a big structural challenge,” says Keenan. They looked at how to make it work and whether they could actually make a difference there.
India was very different from what Keenan was used to. Typically, the firm works with large farms in Europe and Australia that have between 50 and 1,000 cattle. In India, however, the average farm has less than two cows.
By developing a network of village feeding systems, the firm reckoned it could improve efficiency by 30-50 per cent for its customers. It is now working towards a formal joint venture with Calcutta-based food company Keventer.
It expects to finalise this partnership over the next few months. Its next target is to develop a 2-billion-litre dairy business within five years.
We are delighted that we began three years ago. We cant say weve cracked it, but we have sight of how were going to grow, says Keenan.
PM Group
THE PM GROUP, a global project management company that has its headquarters in Dublin, followed its clients to India.
Initially it provided services from its Irish office to clients in India, but as the volume of work grew in late 2008, it decided to set up there.
The company undertook a number of exploratory visits and did due diligence on a number of potential partners before linking up with local architectural firm, VA Group, with whom it had worked on a project for Dr Reddys Laboratories, a pharmaceutical company.
It now has 60 staff in Bangalore, and India is set to be even more important for the group, according to Allan Schouten, managing director of the PM Group in Asia.
Five years ago, the firms business was 80 per cent Irish and 20 per cent international, with none in Asia, he says. Now it is 50 per cent Irish and 50 per cent overseas, of which 10 per cent is in Asia.
In the future, the vast majority will be overseas, with Asia a very healthy part of that, says Schouten.
Its not even a business strategy, it comes down to demographics: 40 per cent of the worlds population is in India or China, he says.
